For the first time, the Supreme Court has considered the doctrine of economic duress in its recent judgment in Pakistan International Airline Corp v Times Travel (UK) Ltd  UKSC 40 (“PIA”).
While it is well established that the threat of an unlawful act can give rise to economic duress, the question of whether a threat to carry out a lawful act (such as threatening to lawfully terminate a contract) can amount to actionable economic duress has been more controversial and uncertain. In PIA, the Supreme Court considered whether the threat of a lawful act can amount to economic duress and the criteria for determining this. In short, the answer was yes – the threat of a lawful act can constitute economic duress, however the threshold is a high one in commercial scenarios.
The Supreme Court judgment is important for any parties negotiating and operating under commercial contracts, and is particularly relevant where the parties may be perceived to have unequal bargaining power.
In 2006, Pakistan International Airlines Corporation (“PIAC”) appointed Times Travel (UK) Limited (“Times Travel”), a travel agent specialising in flights from the UK to Pakistan, as agent to sell tickets on its flights to Pakistan from the UK. At the time, PIAC was the only airline operating direct flights from the UK to Pakistan.
A dispute arose between the two parties concerning Times Travel’s entitlement to commission on past ticket sales. Times Travel asserted that PIAC had failed to make certain commission payments. PIAC threatened Times Travel by saying it would not enter into a new contract with the travel agent unless it agreed to waive its claim for unpaid commission. PIAC served notice under the contract to terminate the contract with Times Travel.
In the meantime, the parties agreed the terms of a new agency agreement, predicated on the basis that Times Travel would waive its earlier claims to commission.
Times Travel subsequently issued proceedings for the unpaid commission against PIAC, contending that it was entitled to rescind the new agreement, which included a waiver of the earlier commission claim, on the basis of economic duress.
Supreme Court decision
At first instance, the Court decided in favour of Times Travel and held that the agreement was voidable for economic duress, even though PIAC’s threat to stop engaging in business with Times Travel was lawful. The Court of Appeal overturned the judgment and held that the doctrine of lawful act duress did not extend to circumstances where the defendant uses lawful pressure to achieve an objective to which it believes it is entitled in good faith. Therefore, PIAC’s pressure did not constitute economic duress, which meant that waiver of the commission claim was binding and Times Travel could not pursue it. Times Travel appealed to the Supreme Court.
The Supreme Court unanimously upheld the Court of Appeal’s decision, however, two judgments were handed down by the Supreme Court – a majority judgment and a minority judgment, which each provided different assessments of when a lawful threat or pressure is sufficient to constitute duress.
All members of the panel agreed that lawful act duress, including lawful act economic duress, does and should exist in English law, having its origins in the doctrine of undue influence.
What are the elements required for lawful act duress?
The Supreme Court agreed that three key elements are required to establish lawful act duress:
- a threat or pressure that is illegitimate;
- the threat or pressure in question causes the party to enter into a contract; and
- the party has no reasonable alternative but to give in to the threat or pressure.
In its application of the test to the facts of the case, the Supreme Court did not dispute that the second and third limbs had been satisfied, concluding that the threat by PIAC induced Times Travel to waive its claim and that Times Travel had no reasonable alternative but to succumb to the waiver in order to enter into a new contract with PIAC, which was important for its business. Therefore the critical question was whether the threat or pressure exerted by PIAC on Times Travel was illegitimate.
All members of the Court agreed that there was no illegitimate pressure exerted by PIAC in this case, because PIAC had genuinely believed the commission in question was not payable, however, the judges differed in their assessment of when a threat of pressure would be illegitimate.
When considering whether the pressure was illegitimate, the court should focus on the nature of the demand made and whether it is justifiable, instead of the nature of the threat.
The Court also agreed that economic lawful act duress must be narrowly confined, so as not to undermine English law’s reputation for certainty in commercial contracts. However, the Court held that the extent of lawful act duress is not fixed – it is fluid – and that courts should approach any extension of its scope with caution.
In the minority judgment, Lord Burrows argued that illegitimate pressure required two elements:
- a “bad faith demand” in relation to an existing right – i.e. the party making the demand does not genuinely believe it is entitled to what it is demanding; and
- the party making the demand must also have created or increased the other party’s vulnerability to the demand in some way.
When applying this to the facts of this case, although it could be argued that PIAC had increased Times Travel’s vulnerability by reducing its ticket allocation, a ‘bad faith demand’ would have required that PIAC sincerely did not believe that it had a defence to the commission claims, which it was pressurising Times Travel to waive. On the basis that it had been established that PIAC genuinely believed it had a defence to Times Travel’s claims, demanding a waiver could not constitute a bad faith demand.
The majority thought that Lord Burrows’ “bad faith demand” test was too wide and that lawful act economic duress should be more restricted. In the leading judgment, Lord Hodge stated that “Bad faith demands may not be a rare occurrence in commercial life. Discreditable behaviour can be a feature of commercial activity.”
The Supreme Court judgment in PIA shows that the scope for a finding of lawful act duress in commercial transactions is narrow and will only be applied in rare cases. The Court recognised that the law accepts that the pursuit of commercial self-interest is justified in commercial contexts. Freedom of contract and certainty are two key tenets that have to be borne in mind and upheld.
Parties negotiating contracts should keep records of their decision-making process to help counter any argument the process was conducted in an ‘illegitimate’ way. Edwin Coe has extensive experience of contractual matters. Parties involved in negotiating contracts can contact Zahira Hussain for advice and assistance.
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